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Tariffs, Trade, and National Security: The U.S.-China Trade War in Context

October 15, 2018
On July 5th, the United States placed tariffs against $34 billion worth of Chinese goods. To many pundits, this was yet another sign of the worsening trade war between the United States and China. However, the latest strife is only part of a larger web of trade disputes involving the United States and the rest of the world. Since imposing a wide reaching 25% tariff on steel and 10% tariff on aluminum, the US has been engaged in a multi-front trade war with adversaries and allies alike. Although similar to previous trade disputes, these latest tariffs are both economically and legally unique, thereby meriting additional analysis. This article explains how the latest trade restrictions threaten not only years of US trade policy but also the country’s international economic and diplomatic standing.

Bush’s 2002 Steel Tariffs

To understand the current situation, it is helpful to consider the history of US tariff disputes. In March 2002, the Bush administration imposed an average 30% tariff on imported steel. The administration asserted that such a tariff was necessary to protect the US steel industry from cheap foreign steel imports. Later the administration revealed that Bush’s motivation were primarily political, seeking to benefit Bush supporters in steel producing states such as Pennsylvania, Ohio, and West Virginia.[1] Regardless of intention, the tariff’s results were underwhelming in their targeted populations and painful everywhere else. The increased cost of steel inflicted a brutal blow to businesses that relied on steel. In addition, due to the massive imbalance in the number of people in steel-using industries compared to steel-producing industries, the cost to the economy was immense.[2] One analysis found that the higher prices cost the US economy nearly 200,000 jobs; a figure exceeding the number of people that were employed in the entire US steel industry.[3] Furthermore, over $4 billion in wages were lost at smaller steel manufacturers.[4] The US International Trade Commission found an economy wide welfare loss of $41.6 million and a GDP loss of $30.4 million.[5] While a handful of jobs in the steel industry were helped by the tariffs, many questioned the wisdom of such a policy “at an annual cost of $2 billion to the steel users-or $584,000 per job saved”.[6]

(Source: Bloomberg)

(Source: Bloomberg)

The response from the international community was quick and hostile. Several key US allies from Japan to the European Union (EU) expressed their contempt for the policy and threatened to implement their own tariffs on US products. In addition, the EU filed a complaint against the United States to the World Trade Organization (WTO). The EU alleged that the tariffs violated the terms of trade the US had agreed to upon joining the organization. Against US protests, the case proceeded and in November 2003 the WTO not only found the Bush administration’s tariffs illegal but that affected nations could place trade restrictions of up to $2.2 billion on US exports.[7] While initially defiant, the administration eventually backed down and Bush removed the tariffs after just 18 months. By most metrics, the tariffs were a failure. Alternative legislative approaches such as direct subsidies, tax credits, or assistance would have been more effective at providing relief while avoiding international disdain.[8]

Obama’s 2009 Tire Tariffs


As another piece of the historical US tariff narrative, following recommendations from the US International Trade Commission Obama increased tariffs on Chinese tire imports. The administration’s rationale was that Chinese tire dumping was making it difficult for US firms to compete. Thus raising tariffs to 35% was thought to protect the US tire market.[9] But as a result, prices for tires rose upwards of 28% in some parts of the country and these increased costs were passed directly onto consumers through more expensive vehicles.[10] The tariffs also failed to bring back jobs from other countries by cutting imports. Rather, US tire imports from all other countries except for China rose dramatically.[11] It is difficult to say whether the tire tariffs had any meaningful benefits, for either American consumers or tire manufacturers. The Peterson Institute for International Economics had harsher words writing in a policy report, “In retrospect, tire safe-guards did not change Chinese policies in a helpful way, nor did they boost US employment. The best thing about the tire tariffs is that they expire in September [2012].”[12]

New Tariffs, New Challenges


While the precedent of previous trade conflicts is already dire, the Trump administration’s steel and aluminum tariffs are different from their predecessors. President Bush’s tariffs on imported steel were imposed under Section 201 of the Trade Act of 1974.[13] Section 201 tariffs, also known as “safeguards” can be invoked when a surge of imports threatens to injure a domestic industry. These tariffs are temporary, meant only to help recover after specific serious economic injuries, and are not targeted against any specific country. Obama acted pursuant to Section 421 of the same trade act. Section 421 tariffs are meant to act against “market disruption” by enabling the President to use temporary safeguard tariffs, identical to those used by Bush, targeted specifically at China.[14]

In contrast, Trump’s steel and aluminum tariffs were implemented under Section 232 of the Trade Expansion Act of 1962.[15] Section 232 authorizes the U.S. Commerce Department to investigate and report whether imports of a particular item pose a threat to “national security” and have the President propose whichever remedy he sees fit. The Department finished their report in 2018 and encouraged the President to apply broad tariffs.[16] This is problematic both at home and abroad.

Domestically, Trump’s rationale for the tariffs is unclear. Regarding security, Defense Secretary James Mattis wrote in a letter to Commerce Secretary Wilbur Ross that the Department of Defense, “does not believe that the findings in the [Section 232 report] impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.” Mattis further expressed concern regarding the negative impact of the report’s recommended policies on our key allies.[17] Foreign steel imports primarily originate from US allies, with China only accounting for 2% of US steel imports compared to 20% for Canada, 13% for Brazil, 11% for South Korea, and more.[18]

(Source: International Trade Administration)




(Source: International Trade Administration)

Economically, higher prices for steel and aluminum will hurt the many industries that use those metals, thereby costing jobs and increasing prices for consumers. Collectively, the various industries impacted by these tariffs — automakers, energy companies, construction, aircraft manufacturers— employ far more people than steel and aluminum producers.[19] Trump’s measures will cost thousands of jobs according to numerous manufacturing groups. Several state economies, such as Louisiana, Missouri, Connecticut, and Maryland are expected to be especially hurt by the tariffs due to their reliance on steel and aluminum imports as well.[20] This is also all without considering foreign consequences. US allies have all threatened to reciprocate with protectionist measures of their own. Harley-Davidson, a US motorcycle manufacturer, recently announced plans to move production overseas because of retaliatory EU tariffs.[21] Chinese retaliation has already taken its toll. With $2.4 billion in new tariffs on 128 US products including everything from aluminum to pork, of which China is the largest global consumer, life will become more difficult for citizens in rural states such as Iowa, Indiana, and North Carolina that voted for Trump.[22]

 

[Image: Graph showing lower U.S. income mobility. Source: Brookings.]
(Source: Peterson Institute for International Economics)

Internationally the move has been met with wide condemnation. Several states have launched complaints with the WTO. In response, the Trump Administration has threatened to invoke Article XXI of the General Agreement on Tariffs and Trade (GATT), the treaty basis of the WTO. Article XXI allows for an exemption to traditional WTO rules for reasons of “national security.” The clause, which has been used only a handful of times in the GATT’s history, is primarily self-judging, meaning the WTO Dispute Settlement Body gives wide leeway to states in determining what constitutes a security interest.[23] If Trump presses forward with, as discussed earlier, a weak national security basis, the administration will normalize the exception and invite all countries to begin making their own determinations regarding what international economic activity threatens security interests.[24] US adversaries, such as Beijing, could further increase their discriminatory trade practices and block US investment. China could even further enshrine their practice of exploiting US companies for sensitive technology and intellectual property for Chinese counterparts by justifying the policy as concerning national security.[25]


Conclusion


The global economy has changed significantly since the early 20th century. Despite these changes, the lessons from the Great Depression and Smoot-Hawley still ring true. In an interconnected world economy, restrictions on free exchange and commerce hurt everyone. However, current trade practices echoes flawed policies taken by earlier administrations and promise similar consequences. Understanding the history of some of our most recent trade disputes will be invaluable to policy makers moving forward in order to mitigate the damage. Furthermore, by using Article XXI, the Trump administration opens the door for future retaliation from other nations under the national security exemption. If the administration is determined to go forward with this course of action, it should offer exemptions to US allies from tariffs and re-evaluate its legal basis for the regulations. Without proper targeting or legal standing, the ramifications from the administration’s trade policy will be far-reaching and painful for American consumers and businesses alike.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

 

References

  [1] https://www.nytimes.com/2002/03/14/business/us-admits-that-politics-was-behind-steel-tariffs.html?pagewanted=all&src=pm
  [2] https://www.politico.com/story/2018/03/07/steel-tariffs-trump-bush-391426
  [3] http://www.tradepartnership.com/pdf_files/2002jobstudy.pdf
  [4] https://www.ft.com/content/89c2d6b2-0095-11e8-9650-9c0ad2d7c5b5
  [5] https://www.usitc.gov/publications/332/3632/pub3632_vol3_all.pdf
  [6] https://piie.com/publications/policy-briefs/time-grand-bargain-steel
  [7] https://www.wsj.com/articles/SB106847190253142400
  [8] https://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1259&context=bjil
  [9] https://www.nytimes.com/2009/09/12/business/global/12tires.html
  [10] https://www.wsj.com/articles/SB10001424052970204488304574431641244584198
  [11] https://money.cnn.com/2017/01/03/news/economy/obama-china-tire-tariff/index.html
  [12] https://piie.com/publications/pb/pb12-9.pdf
  [13] https://legcounsel.house.gov/Comps/93-618.pdf
  [14] https://fas.org/sgp/crs/misc/R40844.pdf
  [15] https://www.gpo.gov/fdsys/pkg/STATUTE-76/pdf/STATUTE-76-Pg872.pdf
  [16] https://www.commerce.gov/news/press-releases/2018/02/secretary-ross-releases-steel-and-aluminum-232-reports-coordination
  [17] https://www.commerce.gov/sites/commerce.gov/files/department_of_defense_memo_response_to_steel_and_aluminum_policy_recommendations.pdf
  [18] https://www.trade.gov/steel/countries/pdfs/imports-us.pdf
  [19] https://www.cfr.org/backgrounder/risks-us-steel-and-aluminum-tariffs
  [20] https://www.brookings.edu/blog/the-avenue/2018/03/06/how-trumps-steel-and-aluminum-tariffs-could-affect-state-economies/
  [21] https://www.nytimes.com/2018/06/25/business/harley-davidson-us-eu-tariffs.html
  [22] https://www.ft.com/content/d14decea-6b5e-11e8-b6eb-4acfcfb08c11
  [23] https://www.law.upenn.edu/journals/jil/articles/volume19/issue2/Bhala19U.Pa.J.Int%27lEcon.L.263(1998).pdf
  [24] https://www.lawfareblog.com/pretextual-protectionism-perils-invoking-wto-national-security-exception
  [25] https://www.wsj.com/articles/chinas-new-tech-rules-make-it-hard-for-u-s-firms-to-take-control-1464870481

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RESOURCE SPOTLIGHT:

  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>